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Headlines
- Mixed economic signals are influencing stock market expectations for the rest of 2024.
- Recent unemployment surge has heightened recession fears, but corporate earnings remain robust.
- Stock market direction depends on corporate earnings resilience and economic growth risks.
The stock market is currently navigating a landscape of mixed signals that are expected to define its performance for the remainder of 2024. On one side, there is a noticeable cooling in the economy, evidenced by a recent increase in the unemployment rate, which has reignited concerns about a potential recession in the United States. On the other side, Wall Street remains optimistic about sustained corporate earnings growth, which could support further gains in stock prices.
JPMorgan (NYSE:JPM) analysts highlighted this duality in a recent note, stating that while the first half of the year focused largely on inflation trends, the second half is shifting attention to growth risks. This shift is driven by high earnings expectations for the latter part of 2024 and 2025. They describe the current market scenario as a two-sided debate, balancing economic growth risks against high stock valuations.
A significant rise in the unemployment rate last week, along with the activation of the Sahm Rule recession indicator, has amplified fears of an imminent recession. The Federal Reserve's persistent restrictive monetary policy adds to these concerns. Such an economic downturn could trigger a sharp decline in financial stocks, similar to the recent Nasdaq 100 dip, where tech giants saw double-digit percentage losses in a single day. JPMorgan's strategists believe that this market pullback stems from fears of weakening growth and reassessment of recession probabilities.
Recently, JPMorgan increased its recession probability estimate for the end of the year to 35%, while Goldman Sachs adjusted theirs to 25%. Despite these adjustments, analysts warn that the stock market could face further declines due to high valuations and the Federal Reserve's reluctance to cut interest rates
Nonetheless, corporate earnings have shown resilience, which could stabilize stock prices or even propel them higher. As of now, 88% of S&P 500 companies have reported second-quarter earnings, with 79% exceeding profit estimates by an average of 6%. Year-over-year earnings have risen nearly 12%, surpassing the 9% growth expected just weeks ago. Forward earnings expectations also reached an all-time high last month, according to Yardeni Research.
This contrast between recession fears and strong corporate earnings is evident. Google search trends for recession have surged to their highest levels since June 2022, a period marked by high inflation and aggressive interest rate hikes. However, mentions of an economic downturn during corporate earnings calls have dropped to their lowest level since the third quarter of 2022.
Ed Yardeni of Yardeni Research noted that the S&P 500 is up 10.5% year-to-date, expecting a period of volatility in the coming months. He also mentioned potential risks from geopolitical tensions in the Middle East but remains positive about US economic growth and equities.
Lastly, JPMorgan analysts pointed out the added uncertainty in the political arena with Kamala Harris emerging as the presumptive Democratic nominee. This new development introduces an additional layer of risk as the election approaches, potentially affecting market sentiment.
In summary, the stock market's direction for the rest of 2024 hinges on the interplay between economic growth risks and the robustness of corporate earnings, amidst a backdrop of political and economic uncertainties.
